Transmission workstream 6 April Overview of TPCR Third Consultation UNC transmission workstream – 6 April Mark Feather

Transmission workstream - 6 April  Overview  Enduring arrangements –Impact assessment –Strawman of arrangements –Revenue drivers and baselines –Incentives  Transitional arrangements –Revenue drivers and baselines –Incentives  Way forward Overview Enduring arrangements Transitional arrangements Way forward

Transmission workstream - 6 April Overview Enduring arrangements Transitional arrangements Way forward  TPCR Third Consultation published 30 March 2006  Outlines latest views on incentives relating to: –transitional regime; and –enduring regime.  Overview in Chapter 5 & detail in Appendix 12. Overview

Transmission workstream - 6 April  Overview  Enduring arrangements –Impact assessment –Strawman of arrangements –Revenue drivers and baselines –Incentives  Transitional arrangements –Revenue drivers and baselines –Incentives  Way forward Overview Transitional arrangements Way forward Enduring arrangements

Transmission workstream - 6 April Way forward Enduring offtake arrangements Overview Transitional arrangements Enduring arrangements  Views have developed though EOWG process to date  Key principle is the extent of user commitment: –All users – GDNs and TCCs (both existing and new) required to indicate their future usage of the NTS –Commitment should be sufficiently far in advance to advise NTS investment planning –NTS then receives investment signals that are financially firm with sufficient time to respond, reducing risk of stranded assets  These proposals should: –improve investment signals; –provide greater clarity over commitment required to secure capacity; and –increase transparency of offtake arrangements

Transmission workstream - 6 April Way forward Impact assessment  TPCR Second Consultation (Dec 2005) outlined high level options for enduring offtake arrangements  Qualitative assessment of these models included in the Third Consultation Overview Transitional arrangements Enduring arrangements

Transmission workstream - 6 April Impact assessment  Favoured approach based on Option EX2 (nodal / nodal)  Do not consider a substitution incentive appropriate  New Option EX2A contains substitution obligation, rather than incentive Way forward Overview Transitional arrangements Enduring arrangements

Transmission workstream - 6 April Strawman of arrangements Way forward Overview Transitional arrangements Enduring arrangements  NGG and SSE strawmen referenced in Third Consultation document, along with our preliminary views on the key issues raised:  Users should signal requirements for “flat” and “flexible” offtake capacity on the same terms  “Expanding flexibility” product seems appropriate (subject to ongoing analysis by NGG NTS)  Favour allocation through a single “capability” product Product definition  Sufficient user commitment a key requirement  “Prevailing rights” model worthy of further development and consideration  Appropriate level of user commitment requires further analysis, informed by profile of investment costs Long term capacity allocation

Transmission workstream - 6 April Strawman of arrangements Way forward Overview Transitional arrangements Enduring arrangements  Nodal allocation of unsold baseline capacity, with rationing by price (subject to a reserve price) seems appropriate  Release of non-obligated capacity (and associated incentive) requires further analysis Medium / short term capacity allocation  Consider further development of arrangements in line with NGG NTS strawman proposals is appropriate  Further work required to understand: –process for long term contracting for interruption; and –how volume of short term interruptible product is set. Interruption arrangements

Transmission workstream - 6 April User commitment and 1 in 20 obligation Way forward Overview Transitional arrangements Enduring arrangements Third TPCR consultation document stated “minded to” Ofgem position:  User commitment should be at the heart of network development  Only incremental investment driven by user signals will be remunerated  Compliance with NGG NTS’s 1 in 20 licence obligation could be achieved by investing in line with user commitments which signals peak aggregate daily demand  Greater clarity of responsibility between NTS users and NGG NTS  Causality for investment unambiguous – users incentivised to provide long-term signals

Transmission workstream - 6 April Revenue drivers and baselines Way forward Overview Transitional arrangements Enduring arrangements  Should be specified by node  Act as both revenue driver “trigger” and define the obligation to release capacity by NGG NTS  Baselines should be determined through “practical maximum physical capability” approach  Substitution obligation in long term Baseline level  Baselines to be static across control period  NGG NTS only remunerated for investments with appropriate level of user commitment  Revenue for incremental investments only triggered following delivery Baseline scope Indicative baselines prepared under a practical max phys approach included in Annex 1 of Appendix 12

Transmission workstream - 6 April Incentives Way forward Overview Transitional arrangements Enduring arrangements  Similar approach to entry proposed  Administered buy back prices for investment-related buy backs  Sliding scale incentive for buy backs for planned / unplanned outages  Views invited on cap for investment-related buy back exposure  Views invited on market or administered prices for operational buy backs Buy backs Payment flows  Movement to Option 2A payments flows model proposed in enduring offtake implementation timescales  Views invited on implementation of Option 2A model Exit investment incentive  Propose removing this incentive, in light of proposals on revenue drivers Other issues

Transmission workstream - 6 April  Overview  Enduring arrangements –Impact assessment –Strawman of arrangements –Revenue drivers and baselines –Incentives  Transitional arrangements –Revenue drivers and baselines –Incentives  Way forward Overview Enduring arrangements Way forward Transitional arrangements

Transmission workstream - 6 April Revenue drivers and baselines  Propose that baselines in transitional period will be used only as “trigger” point for incremental investment revenue  Based on practical maximum physical capability of network  No baselines proposed for interruptible capacity  No baselines for flexibility proposed for this period Baselines  Propose incremental revenue only being triggered once investment is delivered in transitional period  Consistent with enduring proposals, as far as possible  Given not full user commitment model some revenue may be triggered absent a user commitment Revenue drivers Overview Enduring arrangements Way forward Transitional arrangements

Transmission workstream - 6 April Transitional incentives  Interim NTS incentives have three elements: –charges foregone / exit investment incentive; –constrained LNG incentive; and –Buy back / greater than 15 day interruptions incentive. Charges foregone / exit investment:  Propose removing this incentive  Currently restricted to £1m cap  Not proposed for enduring period  Inconsistent with investment planning timescales Overview Enduring arrangements Way forward Transitional arrangements Constrained LNG:  Propose retaining this incentive, and 100% sharing factors, with no cap or collar  Also propose including in enduring period  Views invited on level of target

Transmission workstream - 6 April Transitional incentives Overview Enduring arrangements Way forward Transitional arrangements Buy back / greater than 15 day interruptions incentive :  Incentive currently has 75% upside / 50% downside sharing factors, with a target equal to expected level of greater than 15 day interruption cost  Propose to exclude investment related buy-backs from this incentive (consistent with earlier proposal)  NGG NTS will have right to reduce offtake capacity for maintenance purposes in transitional period, therefore no buy back allowance proposed  Propose retaining greater than 15 day interruption on same basis as currently specified  Views invited on appropriate target, cap and collar for greater than 15 day incentive

Transmission workstream - 6 April  Overview  Enduring arrangements –Impact assessment –Strawman of arrangements –Revenue drivers and baselines –Incentives  Transitional arrangements –Revenue drivers and baselines –Incentives  Way forward Overview Enduring arrangements Transitional arrangements Way forward

Transmission workstream - 6 April Way forward Overview Enduring arrangements Transitional arrangements Way forward  Responses deadline: 28 April 2006 –Note detailed questions listed in Appendix 12 –Helpful to indicate: Whether response is confidential, and In what capacity you are responding eg, licensee, shipper, GDN etc  Keen to understand costs & benefits of package of proposals relative to status quo – plan to issue cost survey in this regard  EOWG to continue until at least June  Initial Proposals due for publication at end of June